Practice Test 9

Question 1

An investment adviser whose personal investing is inconsistent with recommendations made to clients has an obligation to:

Answer 1

DISCLOSE this to their customers.

Question 2

Two characteristics of an equity-indexed annuity.

Answer 2

1. the owner received a guaranteed minimum interest rate
2. and potential upside based on the performance of the designated index

Question 3

If a client is entitled to 80% of the index return capped at 12% (in an equity-indexed annuity) and the index raises by 10%, how much does the client receive?

Answer 3

80% of 10% = 8%

If 80% were more than 12%, the client would receive 12%.

Question 4

Under U.S.A, what persons are exempt from the definition of Investment Advisor?

Answer 4

banks/savings institutions
lawyers, accountants, teachers, engineers whose advice is incidental
Broker dealers who’s advisory are incidental
Bona fide publishers
Federal covered advisers
Any person designated by the Administrator

Question 5

An IA may send account statements directly to clients IF

Answer 5

the IA is audited by an independent public accountant

Question 6

Can ETNs loose value if the underlying index remains stable?

Answer 6

Yes

Question 7

In a revocable trust, assets are assets included in the estate?

Answer 7

Yes, INCLUDED in the ESTATE for federal estate tax purposes

Question 8

One benefit of a Tenancy-in-Common arrangement:

Answer 8

It’s easy to transfer assets to other investors when one person dies.

(no requirement that the couple must be married)

Question 9

What happens next if an Administrator creates a rule?

Answer 9

It must be published.

Question 10

A plan where key employees own more than 60% of the plan’s assets.

Answer 10

Top-Heavy plan

Question 11

The potential loss for a limited partner in a real estate limited partnership is limited to:

Answer 11

Their initial investment plus any unpaid amounts to which she had committed to pay

Question 12

What registration is needed to advise a mutual fund?

Answer 12

Federal registration with the SEC

Question 13

What is net present value?

Answer 13

A way to evaluate investments using cash inflows and outflows as well as a discount rate.

Question 14

Characteristics of a testamentary trust:

Answer 14

1. goes into affect after the donor passes away
2. Required to go through probate process
3. the trustee manages the assets in the trust

Question 15

What is needed to be eligible for Health Savings Account (HSA)?

Answer 15

1. must be covered under high deductible health plan
2. cannot be enrolled in Medicare or be claimed on another person’s income taxes

Also, joint HSAs are prohibited, withdrawls are tax-free if funds are use for qualifed medical expenses

Question 16

Limited registration provision for Canadian broker-dealers conducting business in a state states that:

Answer 16

the BD may transact business with CANADIAN RESIDENTS with whom the BD had an existing relationship

Question 17

A trust that empowers the trustees to distribute principal and is permitted to retain some of its investment income:

Answer 17

COMPLEX trust

Question 18

What is the best source of information to estimate a company’s cash flows?

Answer 18

The issuer’s annual report.

It includes the income statement, balance sheet and statement of cash flows.

Question 19

In order to form a limited partnership, two or more people must:

Answer 19

file a certificate with the appropriate state or local official

Question 20

What type of bonds should be bought to make a portfolio less price sensitive to yield changes?

Answer 20

Bonds with SHORT duration.

Bonds with HIGH coupon.

Question 21

These obtain their value from the price/value of an underlying asset.

Answer 21

DERIVATIVE contracts (options)

Question 22

Any adviser of an investment company is considered:

Answer 22

a federally covered advisor

Question 23

Investors should BUY securities that have a NET PRESENT VALUE that’s

Answer 23

GREATER than 0

Question 24

In a COMMUNITY PROPERTY agreement, when one owner dies the COST BASIS of all the assets…

Answer 24

STEPS-UP to the MARKET VALUE thereby reducing potential capital gains.

Question 25

The trustee is responsible for reporting all income, gains and losses of a trust to the IRS on Form

Answer 25

1041